Zenith Infotech a Step Closer to Liquidation

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An India court is allowing a petition by creditors to move forward that would compel Zenith Infotech to liquidate its assets to pay back its $85 million in defaulted foreign currency bonds.

The days of debt-beleaguered cloud vendor Zenith Infotech may be numbered after an India court cleared the way for a liquidation petition by creditors to move forward.

According to the Economic Times, a court in Mumbai allowed a creditor petition to liquidate Zenith Infotech’s assets to recover at least part of the $85 million in foreign currency convertible bonds that the company defaulted in September 2011.

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Zenith Infotech is said to be reviewing the court’s decision and contemplating a response.

A new development in the saga, according to the Economic Times, is that Zenith Computers, a sister company to Zenith Infotech, is also facing a liquidation petition. Creditors are trying to attach the assets of other company’s controlled by the Saraf family to recover their losses.

Zenith Infotech has been battling to end the debt crisis for the last two years. Sources tell Channelnomics the management team, led by chairman Raj Saraf and managing director Akash Saraf, have attempted with no avail to settle with creditors.

From the beginning, Zenith Infotech maintained that the company was solvent and would pay back the money. However, the company has been dealt a series of blows in which its valuation, partner base and revenues have sunk.

In the most recent quarterly earnings, Zenith Infotech reported a $10 million operating loss. Since the debt crisis, the company’s valuation shrunk from approximately $120 million to less than $30 million.

No reason was ever given for why Zenith Infotech defaulted on its bonds. The default came just a week after the company sold its managed services technology to Boston-based Summit Partners for $55 million. According to international press reports, India companies had a pattern on defaulting on foreign bonds, believing the local courts wouldn’t allow creditors to pursue them. In the case of Zenith Infotech, creditors have dogged the company at that same time India courts and regulators clamped down on defaulters.

In March, the Securities and Exchange Board of India suspended Zenith Infotech’s principals from transacting stock sales and ordered the company to post a $33 million bond to resume trading. The India regulator went as far to say that Zenith Infotech had hidden money that could be used to pay down the debt; speculation is the bond was intended to force Zenith Infotech management to repatriate the money from offshore accounts.

In July, Zenith Infotech won an appeal that allowed it to trade stock without the security bond, thus giving the company and management team the ability to raise new capital to fund operations and pay down debt. However, the company’s board of directors on July 19 informed India regulators that “the accumulated losses have exceeded the net worth of the company.”

During the debt crisis, Zenith Infotech has worked to transform its business from managed services and backup to cloud infrastructure. While Zenith Infotech has shown promises as a cloud provider, its debt crisis has caused technology and reseller partners to defect to competitors.

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